Where did restaurant king's millions go?

Sept. 2, 2010

Updated Aug. 21, 2013 12:28 p.m.

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An investor loaned $3 million to John Gantes in 2007 and 2008 for this Burger King in Santa Ana. According to bankruptcy papers, it's now worth $1.7 million. Burger King at 2100 E. 17th St in Santa Ana. Joshua Sudock, The Orange County Register

An investor loaned $3 million to John Gantes in 2007 and 2008 for this Burger King in Santa Ana. According to bankruptcy papers, it's now worth $1.7 million. Burger King at 2100 E. 17th St in Santa Ana. Joshua Sudock, The Orange County Register

In December 2007, one of the richest men in Orange County asked Wayne and Kathy Riley for a $795,000 loan.

For the Rileys, of Bend, Ore., it was a lot of money - a big chunk of their profit from selling four Burger King restaurants to John Gantes.

For Gantes, who claimed a net worth of $215 million, the Riley loan should have been pocket change. But in fact the Laguna Niguel restaurant king needed the money. He was borrowing millions of dollars every month to keep his empire afloat.

When the money ran out in the summer of 2008, he stopped paying bills. In December, less than a year after the Riley loan, he declared personal bankruptcy. He also filed for protection for 29 of his companies in U.S. Bankruptcy Court in Santa Ana.

His personal net worth had evaporated, leaving him $374 million in debt. On paper, he had burned through $600 million in a year.

Most of that money was borrowed, much of it at double-digit rates.

To Gantes' defenders, this is a story of a good businessman who borrowed big at the wrong moment, just as real estate prices plunged and recession-haunted diners decided to stay home. To a handful of his creditors, this is the tale of a man who deliberately inflated his assets so he could borrow tens of millions, knowing all the while that he could not repay.

Gantes' loans fall outside of any regulatory agency. But the Rileys and five other creditors have sued, alleging he obtained their money through false statements and fraud.

Dan Chaon of Global Swift Funding alleges in his lawsuit that Gantes concealed overdue taxes and liens from investors and is still misrepresenting property values in his bankruptcy filings.

Chaon described Gantes as "a helluva sales-talk artist. ... He provided false financial statements, and everyone got caught up in that game."

Gantes' attorney, William Burd, says Gantes is simply a victim of the recession. He declined to make Gantes available for an interview or photo.

"No money went where it shouldn't have gone," Burd said. Gantes "categorically denies there was any wrongdoing. ï¿½ And we'll prove it in court, if need be."

EMPIRE BUILDER

The son of an Orange County restaurant operator, Gantes, 54, grew up in the business. While still a student at Stanford, he took over management of his father's restaurant and quickly tripled sales, according to a 2006 profile in a publication for restaurant franchisees, "Area Developer."

"He's a very intelligent man," said Brian Price, a Mission Viejo consultant who worked for Gantes for 19 years. "As far as finance, he borders on being brilliant."

Gantes worked long hours, routinely reading trade papers and the Wall Street Journal before dawn, arriving at his office at 6 a.m. and staying late into the night. When traveling with him, Price recalled, they would try six or eight restaurants in a single evening so Gantes could see different concepts.

Working quietly over the past quarter-century, Gantes built an empire of Burger Kings, Applebee's, Coco's, Famous Dave's, On the Borders and Arby's - some 110 franchised restaurants stretching from Las Vegas to Washington State.

He would buy land, build a restaurant, sometimes two, then borrow against the land to buy more land and build more restaurants.

About 50 Gantes-controlled companies operated the restaurants. Another 60 or so companies owned the land. A third group of Gantes companies provided managerial services like payroll and bookkeeping to all the others.

Gantes made money three different ways.

As the manager he charged his restaurants a fee, ranging from 5 percent to 6.25 percent of sales, Chaon said.

As the landlord he charged rent.

And as the owner, he tapped his companies for loans, both to himself and to his other businesses. In his bankruptcy petition, he listed some $24 million in loans from his companies to trusts that he controlled.

For a long time, lenders - banks, hard-money loan companies and individual investors - shared in the bounty.

"He was a good borrower for a lot of years," said Jim Perry, president of Aliso Viejo hard-money lender Alliance Portfolio.

Today hisbankruptcy reorganization petitions by 29 of his companies list an additional $18 million in intra-company receivables. Such inter-company loans are common among related businesses, but could become contentious in bankruptcy court—where creditors argue that any money left should be going to them.

BORROWING BIG

In early 2006, Gantes stepped up his borrowing. Between March 2006 and April 2008, according to personal financial statements filed in court, he nearly doubled his debt, borrowing $77 million, or about $3 million a month.Most of the money came through private money deals with individuals and hard-money lenders.

Despite all that new debt, his net worth kept rising—based on ever-larger real estate holdings. Some of the new loans went toward specific projects, including a Hilton Garden Inn in Palmdale worth at least $12 million. But it is unclear from bankruptcy and land records where most of the borrowed money went.

Between November 2007 and April 2008, for example, Aliso Viejo hard-money lender Point Center Financial loaned $17.85 million on six Gantes properties.

The stated purposes for most of the loans, according to documents prepared for Point Center investors was "to refinance existing property debt and provide capital for development on new restaurants."

At the time, Gantes was building several new restaurants in California, Washington and Las Vegas. But the documents do not identify exactly where the money went.

The documents also said Gantes could have borrowed from banks but instead chose Point Center - and its 12-percent interest rate - so he could close the loans within 30 days.

Point Center itself, which is run by Dan Harkey, husband of Assemblywoman Diane Harkey, would run into trouble with its investors, as more than 60 percent of the loans he arranged went into default and 50 investors sued him and his wife for fraud.

In a brief interview, Harkey declined repeatedly to comment about the loans to Gantes.

NOWHERE TO TURN

The money spigot ran dry in early summer, 2008.Credit was tightening nationwide, and some of Gantes' properties already had two or even three mortgages.

With no loans coming in, Gantes quickly began shorting creditors or stopped paying them entirely.

In June he failed to pay part of the Riley mortgages, according to their lawsuit.

In August, as he was opening the Palmdale hotel, he fell behind on other mortgages. Farmers & Merchants Bank demanded and got a mortgage on most of his properties to secure an existing $22.5 million credit line.

In September Point Center declared him in default on their mortgages.

In October he stopped paying the Rileys, the Oregon couple who had sold him their four Burger Kings.

Sometime during those months, he also stopped paying routine bills for food supplies, for $1.6 million in Burger King franchise fees and for millions more in sales and payroll taxes.

By early November the state Board of Equalization was threatening to install a "keeper" at his restaurants to take cash from the till to pay overdue taxes, Gantes said in a sworn court declaration last November.

That would have stripped the restaurants of the cash they needed to pay for food and employees. To avert that, he filed the first of 29 business reorganization cases in bankruptcy court on Nov. 6.

After learning that he was on the hook for $14 million in employee payroll taxes, Gantes filed personal bankruptcy on Dec. 12.

Rising land prices had helped Gantes build his empire. Now those prices slid into reverse, preventing him from borrowing more money just as he faced a cash crunch.

An example: Point Center had loaned $9 million on three Burger Kings with a combined appraised value of $13.8 million between late December 2007 and early April 2008. When the owner, Gantes-controlled Burger Pacific LLC, filed bankruptcy in February 2009, it estimated the three properties were worth a total of $6.18 million - less than half their appraised value in early 2008.

In his personal bankruptcy papers, Gantes says all of his companies owe more than they're worth. He lists their value as zero.

FRESH START

Bankruptcy Court is providing Gantes with a fresh start, free from bill collectors and all but a few lawsuits.

While his lawyers work to wipe away $377 million in personal debts, he appears likely to keep his home in a gated Laguna Niguel neighborhood and many of his restaurants. Most of his creditors are cooperating.

Meanwhile, Gantes continues to manage the restaurants, and even kept control of one after it was foreclosed.

When Point Center seized a Burger King in Temecula belonging to Burbreck, a Gantes partnership, it allowed the tenant to continue operating the place. The tenant, according to court records, is another Gantes-controlled partnership, River King.

Creditors have not been nearly so lucky.

In late 2006, George Wong, a Rancho Palos Verdes real estate agent, extended a $2 million second mortgage to Gantes on a Burger King in Santa Ana.

When the first mortgage holder, Alliance Portfolio, threatened to foreclose on its $975,000 loan to Gantes in October 2008, Wong quickly paid Alliance and took over the first mortgage.

If Wong hadn't done so, said his attorney, Edward Schloss, "my client would have been left without a dime."

So Wong now holds two mortgages for nearly $3 million on a property worth no more than $1.7 million.

In an April 10 court declaration, Wong said Gantes' failure to pay "has been devastating."

"In order to meet my financial obligations, I have been forced to borrow in excess of $450,000 against my credit line," Wong wrote. "In addition, it has caused incredible stress to my marriage."

Wong, like most of the creditors, has not sued Gantes. Schloss is trying to work out a settlement that will give his client a chance to eventually get his money back.

"What are you going to get (from a lawsuit)?," asked Perry of Alliance Portfolio, who is owed $18 million and is not suing. "A legal bill for a lot of money."

LAYING BLAME

Among the handful of creditors who are suing, Chaon of Global Swift Funding is the loudest.

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